Evidence on the Presence of Representativeness Bias in Investor Interpretation of Consistency in Sales Growth

47 Pages Posted: 22 May 2015

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Irfan Safdar

Widener University

Date Written: May 19, 2015

Abstract

We document that consistent patterns of sales growth that are incongruent with underlying fundamentals are followed by significant stock price reversals. In contrast, no stock return reversals are found for firms that achieve the same level of sales growth in an inconsistent manner. Furthermore, future earnings announcement returns mimic the pattern of abnormal stock returns documented for consistent and inconsistent-performance portfolios, corroborating our main findings. The results are robust to controls including magnitude of sales growth, fundamental strength, and business cycle risk exposures. Our evidence is consistent with representativeness bias affecting investor interpretation of consistent sales growth patterns.

Keywords: Representativeness, Behavioral Finance, Asset Pricing, Fundamental Analysis, Stock Return Predictability

JEL Classification: G12, G14

Suggested Citation

Ahmed, Anwer S. and Safdar, Irfan, Evidence on the Presence of Representativeness Bias in Investor Interpretation of Consistency in Sales Growth (May 19, 2015). Mays Business School Research Paper No. 2608619. Available at SSRN: https://ssrn.com/abstract=2608619 or http://dx.doi.org/10.2139/ssrn.2608619

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Irfan Safdar

Widener University ( email )

Chester, PA 19013
United States

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